How to Grow Your Company?: Organic or by Acquisition

In this episode, we explore two key strategies for business growth: organic expansion and growth through acquisition. We break down the advantages and challenges of each approach, including speed, certainty, cultural considerations, and financial implications. Whether you're looking to add customers, expand into new regions, or acquire complementary products and distribution channels, this discussion offers practical insights to help business owners decide the best path forward.

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TRANSCRIPT:

Welcome to Integrated Insights with ICCG. For more than 30 years, our team has

partnered with small business owners to prepare for and navigate the business

transaction process. Pull up a chair as we share stories and insights from our

experience on all sides of the M &A table. All right, we're back for another

episode. today I have the founders of ICCG with me, Grant and Dave.

My name is Michael. I'll be your host. Today, we're going to be talking about

growing, growing your business. In some cases, it's better for a business to grow

organically or to grow an in -house. Other times, growing by acquisition can be more

favorable. Grant, Dave, why would a company pursue growth through acquisition versus

growing organically? Yeah, I mean, it's great that you as a business owner are

considering how to grow your business. But both of those strategies are necessary to

contemplate, but there's always a better way and it's going to be based in your

context. And You know, a long time in the past when we owned some towing companies,

we would go and we would buy a company that had a city contract. And so because

those city contracts were super important to the success of the business holistically,

and then we would go after accounts organically. If we were just going to wanting

to widen our geography by gaining accounts in different places, we could just take a

bunch of trucks and stick them in that area and take the business away from

competitors. And so sometimes you grow because you want to add customers,

sometimes you grow because you want to add geography, and sometimes you want to

acquire another company's products and distribution channels so you can throw your

products through their distribution channel. So it's not like you're establishing the

same business in a different area. You're actually buying a completely different

product line with a different distribution channel that can be used to throw your

products through and then you could use their products to throw through your

distribution channel. But they're completely two different animals. When you buy a

company in another area, or in your own area, it's a very different prospect than

just trying to grow by adding geography or adding customers in a different area.

- Right, I think another part of that grant is, that's talking from a business owner

standpoint. And if you want to talk from a buyer standpoint, we deal with a lot of

private equity groups and people who may be wanting to expand their business.

So when we talk to what we call buy side people,

they're looking at this maybe a little bit differently like a business owner.

Business owners wanting to grow, like you say, organically or through acquisition,

they're looking at maybe they want to buy their first one is going to be their

platform company. For a lot of, you know, it's no secret out there,

a lot of the private equity groups, they kind of go off this three to seven year

flip on the business, but they're growing. They want to grow fast. They want to get

their EBITDA up to a certain level. And once that, you know, EBITDA gets up there,

they can flip it for a higher multiple. So they're wanting to go through, grow

through acquisition because it's a quicker way to the end goal. But their end goal,

you know, like we, the motives are pure, right? The end goal is that money grab.

So for most of them, but from a business standpoint, and I know that when we had

the towing companies, we did, we did both, right? And I think for a business owner

who's wanting to be smart, and they're in it for the long term, you know, they're

going to, they're going to grow organically. And also possibly look at our

acquisitions, because one of the best choices they may make is to buy out their

competition.

Then collectively, they're in a position to then grow greater organically.

What's the why behind that? I know you talked about they can grow faster through

acquisition, and sometimes that's both companies, right? So they can acquire a company

and both companies can actually grow faster. Why is that? Why is it sometimes faster

to grow your customer base or your products or whatever by having another company

instead of growing organically? It's not just because of the speed,

although that's definitely in the minds of a PE group, but it's also because of the

certainty. If I go into another area and I buy a business, I'm I'm gonna do due

diligence on that business. That's gonna tell me, okay, that's gonna yield a million

dollars of cash flow every year. It has existing equipment,

it has existing employees, it has an existing facility, it's an existing name in

that area. I know that I can carry on what I'm buying that's gonna yield a million

dollars on the bottom line. When you grow organically and you invest money, you

don't really know what the outcome is going to look like. You don't know what the

extent of the outcome is and you don't know what the timing of that outcome is. It

could take you a long time because you just don't, you don't understand the culture

of that particular area of the country or area of town and the outcome is certain

and so that's why purchasing a company sometimes is a little bit more of a it's

it's a less risky but a higher cost option initially.

Yeah and I think that's what keeps people I think that's what keeps people Michael

from from acquiring a lot of times. I mean maybe they're maybe they've been debt

-free we work a lot of business owners who've grown their business over decades

decades. They're debt -free. Their balance sheet looks great. And to talk to them

about, "Hey, why don't you go buy this company for $5 million?" Well, that's, they

may not want to use the cash and it's going to cost debt. And that's, you know,

some people are adverse to that. So it all depends on the motive, I think, and,

you know, how quickly someone wants to get to that goal. We may recommend that

someone go out. If they're selling their business, we may say, you know, if you

want to go on and prepare your business a little bit a little bit more. Why don't

you go buy it? Let's get your bottom line up a little bit and it's going to be

worth that because you're going to be able to make it back in multiples after the

sale if you buy something that's profitable.

Again, we have a client that buys a lot in the medical space and they're looking

at how many patients come through the facilities and it's very, very calculated. And

so for them to go out and buy something, they're going to basically buy in patient

count and they know what to pay for the patient count. And, but at the same time,

they're not giving up on growing that company. You know, they want all of the

facilities to continue growing organically. But sometimes that helps because then

they've got the masks, they may have the name recognition out there to help that

Yeah, it's it's such a better bet from it for you know business owner to buy

knowns and So days, right? I mean, you know, some people don't want to spend the

money or borrow the money in order to expand and Unfortunately,

not every effort to do the same thing that you've done and your existing facility

can be duplicated elsewhere because the environment's different, the people in charge

are different,

and there's other competitive environments that you're not used to. - Yeah, that's

great. So there's multiple factors basically. What I kind of heard you guys saying

is certainty can be a factor, right? Just taking some of the risk out of it there.

Sometimes the trial and error an error, there can be a high cost to the trial and

error, but sometimes it's just goal -driven. If they're already growing and they're

growing as fast as they want to grow, there's not really a reason to make that

change. But if they're growing, but they want to grow faster, or they want to exit

more quickly at a higher amount than what they're trending toward, then that might

be a reason for acquisition. So that's awesome. So you talked a little bit about

the towing industry and what it can look like there, how can this conversation

change over industry? How can industry affect the choice?

Yeah, you know, we just talked about the medical industry and licensing is very

important. You know, there are other,

I guess, you know, zoning and those kinds of issues that you have to deal with in

certain industries.

A lot of people who are considering growth are talking about customer -facing

facilities

when they're wanting to grow in other areas. And so sometimes what you're to buy is

not necessarily a manufacturing plant, you're actually going to buy whatever is the

customer facing piece of that. And so sometimes it's because you want the

manufacturing piece, because you want to buy capacity, you know, that company has

some customers, but they're not really that profitable and you need capacity. And so

in a manufacturing company that is built on, you know, high capex,

you're going to buy the equipment anyway to expand. And that company over there is

you can get it for basically the value of the equipment, you know, if they're not

making that much money. And you've got existing employees to operate existing capital

equipment and it's like instant capacity that you can then use in order to chew

away at your backlog at your existing facility. So every industry has multiple ways

and multiple reasons to expand. So what about cultural differences?

I know I think we've talked about an example on another broadcast before about how

cultural differences between two companies and acquired company and the buyer.

How can that play into this decision and what can that look like?

We learned that firsthand in one of our acquisitions in the towing industry.

to us, I guess. You know, you learn, look, if you're a business owner listening to

this, you know you learn something almost every day. Well, we learned something. We

bought this company and we tucked another one in under it and we thought, "Well,

we'll bring the dispatch together." And we found out real quickly that that wasn't a

good idea. They had dispatched totally different. There were, it was a different

socioeconomic situation in both locations And it was oil and water and it just

didn't work and it took what what grant probably six months eight months nine months

Something like that and their managers came to us and said we need to unwind this

and our and our you know We had the typical response of well granted because he's

the bean counter of the group You know that's gonna cost us too much money But you

know morale is worth a lot right and when you start changing over people people

cost a lot and so It was well worth the money to honor the culture that had been

built over the decades and to honor that culture and to try to build around that

culture rather than trying to change the culture. And I think sometimes we try to

go in and change culture rather than try to honor the culture that has been working

hard for you for all those years. And so that's one way. Like, Speaking of the

medical world, people we're working hard for right now, they have acquired several

locations, and one location was just run so differently that the poison is treated

very differently. A lot of that came from some cultural things, and they had to go

in and kind of really, they didn't want that culture because it was a very toxic

culture, and so they had to really work and lost some people along the way because

it was better to change the culture, because it wasn't serving the patients well,

and it wasn't serving the community well. And so sometimes that's when a culture

change is warranted. - Yeah, I would say, Michael, and one of the things that came

to mind was the times where, A, the mistake one that Dave and I made,

But the times where we get pulled into those things, unfortunately, it's either late

in the game, where they've already identified the target and everything's,

you know, go and please get this done quickly.

And, you know, it's just really hard then to come up with all of the,

you know, the cultural problems, or those things that need to change.

People are sometimes, particularly buyers of businesses, they look at the bottom line,

they get romanced by the customer base, or they get romanced in this particular case

by patient count or whatever, and you get what's called toxic positivity,

right? You overlook some of the warnings that are there.

And I think that's easy to do. And so having sort of an independent look at it or

an advisor look at it from the outside and not worry about being the Debbie Downer

in the room, but really kind of look through, not necessarily coming up with ways

why you didn't do it, but maybe giving you a task list that says,

"Hey, you need to make sure that you cover this," and even in negotiating the deal,

in that particular case, our client priced into the deal the ability to turn over

the staff.

We just help our clients have a little bit less of that bias or toxic positivity,

I guess, and make sure that they're considering all of that when they price the

deal. - I'll go one step further. We know when we've worked with, when we're working

with really seasoned buyers, seasoned investment groups or seasoned PE groups or

whatever, because they're asking the right questions about culture. They want to know

about individuals, they want to get to know people, they want to get to know, we

may not always let them get to know the people until late in the game, but they

care a lot about that. And obviously, it's probably because they've been burned

before and they know the difference with that. And so those are the right questions

buyers need to be asking. And what's interesting about that is that's really carrying

well for the people that our sellers would want. One of the first things they

always say is we want our people well cared for. We want to make this as family.

How many times we hear that all the time? This is family. We want to make sure

that they're taken care of. Well, the way you do that is to make sure that you

hopefully the buyer is doing their diligence. And you're disclosing that you can't as

well. It's not just diligence though, Dave. I've seen you make sure that our seller

clients know a little bit more about the buyer from a standpoint of what they've

done prior to that, how they are going to treat your people. And we sometimes talk

to our people, our seller clients, and say, hey, you can probably get a better deal

over here. And here's and, you know, is it worth your while knowing that this other

group are seemingly good people and are going to have proven themselves over prior

deals of doing right by people. And so,

you know, that's one of those things of, you know, us knowing the buyer or having

dealt with a buyer or no people who have dealt with that buyer is super important.

I think and super helpful for our selling clients. You know, we're not supposed to

be biased towards a buyer, but we are.

Yeah, and I think that's right. We're not really supposed to present all the deals,

but at the same time, you know, we're also being,

you know paid to make sure we're finding the right buyer and sometimes we tell

people we can get a high -price buyer we find the right buyer which one do you

want and more times than not someone will take the right buyer if they really care

about their people and their culture and and honestly when I think one of the deal

one of the things that people don't realize that people in our position actually do

is we spend a lot of time vetting buyers we spend a lot of time in the

negotiation process asking these questions that we'll flesh out. We hope we'll flesh

out how someone's gonna be treated. And we've had deals unwind in the middle of the

process because it became real evident that these people weren't gonna treat the

sellers people right. And the sellers just turned around and wound the whole thing.

And we go back to the, you know, we go back to the table and find someone else

at that point. And yes, it's a shameless plug for good M &A advisors right there

because they should be totally a shameless plug. Make sure whoever you're working

with is doing work for your benefit. Yeah. And one of the things that can be super

important to protecting your people is what the management teams look like on both

sides, right? So what have you guys seen as far as management teams set up,

whether it be strong, or whether it be lacking, and how has that affected the

options or how the transition took place?

Yeah, most of the transactions that we've done, you know,

I think the buyer is either a P -backed business or a P -private equity group who

is not necessarily necessarily wanting to expand by taking over the whole business

and kick everybody out. Most people understand the risk of doing that is really

high. I know that most people think that what happens is,

A, company A goes and buys company B and They fire half the people and then they

expect double the profit because of that. That's not really the case.

I mean, there are some duplications they try to avoid, but at the end of the day,

they know that they bought that business that is at this particular point,

the way it is, it's all together and it's accomplishing something that is worth the

price that they paid. and they wait until they get to know people, they get to

know processes, the wise ones do anyway. They don't blow anything up.

And it is difficult. The middle managers, you know,

getting along with a previous competitor. So if you go out and you buy a

competitor, now all of a sudden I've got to ride for a different brand,

that's hard. And so sometimes you've got some work to do there. And we,

you know, our clients have to do the seller clients have to do some selling, you

know, hey, for the last 20 years, I've told you that those guys are idiots. And

now they're your best friends, you know. And so that's hard.

But it every day and and you know change is hard.

You have early adopters and you have people that will never be okay with it and

they will sometimes leave.

Yeah yeah I think management teams Michael are extremely important. I mean we we

really try to encourage most the companies like Grant said have the management team

in place and and there's a place for them most of the time. Most your PE groups,

so again this gets back to the conversation we don't want to have today, we've had

other days about strategic versus financial buyers. The strategic buyer will come in,

they may have they may have a upper -level management team that they can put in

place or have someone that they can put in place, but typically no matter who a

financial buyer definitely wants a good management team in place and oftentimes that

makes it difficult for the owner to leave.

So, you know, and I think the other thing that we overlook when we talk about

people, and we probably should have brought this up earlier on, we're talking about

acquiring, you know, one thing that's happening in the trades world out in the

construction trades business out there is oftentimes companies are buying other

companies, they're acquiring them just, yeah, they want the accounts, but they also

want the people because people are so tough to find the trades. People are really,

really in high demand right now. And I know up in the Pacific Northwest, you may

have an electrical company buy another electrical company just because they want their

electricians. They're just trying to, because they're just not available. So there's

just nuances to every deal out there. Yeah, that just goes back to that whole

capacity thing, right? You're buying capacity because maybe not for equipment but for

people because you've got because sometimes it's easier to make a sale than to

fulfill the sale. One last question before we wrap up here.

So sometimes it can be awkward to start these conversations and maybe there's a

business owner out there that wants to find a buyer for their business, wants to

buy another business, something like that. But they don't have anyone in mind. They

don't have a friend that's doing it that makes it a natural transition. How can

talking to an intermediary like us, how can we help in that process?

- I think we had the same discussion with people and just, you know, I think, you

know, if you're working with somebody who has experience and seeing how different

deals roll, then I think that you're going to be able to, and that own businesses

themselves. And I think that becomes, that becomes a little bit of an anomaly out

there when you start trying to find M &A advisors who actually have run a lot of

businesses themselves. I think that's maybe one thing that we have that we have some

experience with that in a lot of different industries. But having those specific

stories but having others examples to be able to sit down with people and say these

are different ways this can go let's walk through let's see what you think would be

best and if you're preparing to sell in the future and they think we'll walk

through that you know we'll help with the performance together and walk through the

different scenarios but I think finding someone that has experience and has seen real

deals happen I think that's just walking through with them That's that's that's what

I would say. Yeah, you know, Dave and I have always said that The our clients

business owners that we've ever dealt with are really really smart They make great

decisions. That's why they've built successful businesses and

And it's just that they don't they've never been in our space So maybe they've

built a business up for 30 years or for 20 years, they haven't ever bought a

business necessarily. They haven't ever folded two businesses together. They've never

really remotely managed a business because they're inside of the building where they

are right now and they're buying a business somewhere in Texas that is remote from

them. So how do I manage a remote business? And I would say this just goes to all

of the transactions that we do, a lot of those business owners do nothing because

they don't have answers to the questions. They, and therefore they, even as smart as

they are, the lack of information or the lack of answers or even understanding who

to go to to ask those questions, just paralyzes the process.

And so if they just sat down with us and just brainstormed and said, hey, what if,

you know, again, Dave said, we've got, you know, we've got experience doing all of

it. We know what the process looks like. We know what he's going to have to spend

for a specific type of business. And he can then prepare and see whether he has an

appetite after spending time with us. And we can certainly help them go out and and

and purchase a business and we'll talk to him I mean look we'd love to buy a

business for somebody but if it's not the right answer and the right answer is to

go stick some equipment in another zip code and start a business and do it

organically then he's gonna know that because he's smart enough to figure that out

it's just the the buying of a business that sometimes people get really, really

paralyzed about because they just don't know who to ask and they don't even know

what questions to ask.

I would add that I've seen this team do a really great job in one,

if there's a relationship between the buyer and the seller, protecting that

relationship and two, quarterbacking Right. And just not allowing any kind of

relationship, the fact that they're both in the industry, they both earned and

developed this, to come into the negotiation and come into the process of the

acquisition. So really love seeing that from this team. Well,

hey, Grant, Dave, thanks for joining me today. That's all we got for that episode.

Thank you.

And that wraps up another episode of Integrated Insights with ICCG. Be sure to

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